Alabama’s New Non-Compete Law
Alabama’s New Non-Compete Law Should Provide Clarity to Employers and Employees
By: Richard J.R. Raleigh, Jr.
On January 1, 2016, Alabama’s non-compete law will receive its first real update in years. I was honored to be a part of the group that drafted the update. Alabama Code Section 8-1-1 is entitled, “Contracts restraining business void; exceptions,” and it defines what types of covenants not to compete will be enforced, and how they will be enforced. The New Section 8-1-1, passed by the Alabama Legislature this past session and signed by Government Bentley on June 11, 2015, was the result of years of work by a committee of the Alabama Law Institute, a legislative agency that operates with volunteers whose goal is to clarify and simplify the laws of Alabama, to revise laws that are out-of-date, and to fill in gaps in the law where there exists legal confusion.
The main goal of the update was to take the existing statute, along with the multitude of cases that interpreted the law, and clarify things for employers and employees. In the past, the lack of clarity has made it difficult for employers and employees to determine in advance whether the agreements they entered into would actually be enforced by a court. The result was many hundreds of lawsuits. The existing general proposition is unchanged – “Every contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind otherwise than is provided by this section is to that extent void.” However, the update to Alabama Code Section 8-1-1 lays out the exceptions (six of them) that presently can generally be found only by going through the facts of the appellate court decisions that interpret the present act. For example, non-competes are permitted when the party “holds a position uniquely essential to the management, organization, or service of the business” and when someone sells a business they can agree with the buyer to not carry on or engage in a similar business inside a designated geographic area. They are subject, however, to restrictions concerning time and place.
Another place the New Section 8-1-1 adds clarity is in defining that “[r]estraints of one year or less are presumed to be reasonable.” This presumption may be rebutted. But, whereas employees, employers, and lawyers previously had to sift through hundreds of cases to try to guess whether a time period in an agreement might be later determined by a court to be “reasonable,” now they can be confident that on most occasions, a non-compete of a year or less will not be struck down because of the time period (although it must still meet other requirements, such as being reasonable in terms of geographic scope and being tied to a protectable interest).
The New Section 8-1-1 also declares that one may be contractually bound to not solicit customers of an ongoing business, subject to reasonable time restraints, clarifying that non-competition and non-solicitation agreements are to be treated similarly. This is not something that has been clear previously, if one reviews the numerous appellate court decisions in this area.
Whether there was a “protectable interest” sufficient to warrant the restraints of a non-compete is a frequently litigated issue. The recently passed and signed update to 8-1-1 adds some clarity, setting forth several things that qualify as a “Protectable Interest.” These include trade secrets, confidential customer lists, confidential commercial data, relationships with clients and customers, and specialized training (although not simply job skills). With regard to “training,” the ALI committee again intended to follow the course and theme of existing case law, which in this case differentiates between specialized training that an employer pays for, which may give rise to a protectable interest, and regular on the job skills and on the job training, which in and of themselves do not usually give rise to a protectable interest.
While the burden remains on the party seeking enforcement to prove each requirement, it is clear under the new law that an employee or other party resisting the non-compete agreement contract has the burden of establishing there is an “undue hardship” if they raise that defense. Previously, there has been debate as to whether the party seeking enforcement had the burden to essentially prove a negative – that the party restrained does not have an undue hardship. Again, the new statute adds clarity.
“Professionals” may not be restrained by non-compete agreements, both under the old and new 8-1-1. Doctors, Lawyers, Certified Professional Accountants, Veterinarians, and Licensed Physical Therapists have been recognized as professionals exempt from such restraints on trade.
Many non-compete agreements contain language asking a court to essentially rewrite an agreement if the court decides it is unreasonable or overbroad because it is too long or the geographic area of restraint is too large. This language is called “blue pencil language.” New expressly permits a judge to redraft the agreement to comply with the goals of the parties as much as possible while still limiting restraints to reasonable amounts.
Finally, with regard to remedies available if a party breaches a non-competition agreement, the new law provides that a prevailing party may get an injunction and other appropriate equitable relief, actual monetary damages suffered because of the breach, liquidated damages (if the agreement provides for these), other remedies available under existing contract law, and costs of litigation and attorneys’ fees (again, if the agreement provides for these). Prudent employers will review their agreements to ensure those agreements provide for recovery of fees and costs if they have to enforce an agreement in court and prevail.
In short, New Section 8-1-1 of the Alabama Code codifies many of the rules and requirements set out in appellate court decisions interpreting Alabama’s non-compete statute. Hopefully, the new law will help businesses and individuals in Alabama better understand what they may ask of others and what may be asked of them with regard to restraints on trade. Before the new act goes into effect on January 1, 2016, employers in particular should review their current agreements and decide, particularly given the rebuttable presumptions regarding time periods, whether they should update or revise their agreements.
About the author: Richard J.R. Raleigh, Jr. is an attorney and shareholder with Wilmer & Lee, P.A., a law firm with offices in Huntsville, Decatur, and Athens that represents businesses, individuals, and governmental entities throughout the Southeast. He is presently the President of the Alabama State Bar. Rich is also a member of the Alabama Law Institute and served on the committee of the ALI that drafted the new non-compete law and the committee comments to the new law.